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25 Sep

When Is The Right Time to Refinance Your Home?

Mortgage Refinancing

Posted by: Krishna Menon

You could be asking yourself if now is the right time to refinance your home. First you need to know whether or not it’s in your best interest to do so, and then figure out what type of refinancing is right for you.

Types of Refinancing

There are two types of refinancing you can consider:

 

  1. If you’re looking to save money then you might want to consider refinancing your rate and term. This means that you’d refinance the remaining principal of your mortgage loan while decreasing your interest rate, as well as the term of your mortgage. This can make your mortgage more affordable.
  2. Now, if you have existing debts and this is the main reason that you’re considering a refinance then you will want to go with a cash-out refinance. In doing so, you’ll get an entirely new mortgage for a larger amount than you currently owe on your existing mortgage. The difference in cash, you enable you to pay off your debts.

 

If you have an adjustable-rate mortgage with a fixed-rate loan, you’re going through a divorce settlement or your want to eliminate your mortgage loan insurance, then refinancing may also be the right choice and decision for you.

Is Refinancing In Your Best Interest?

Most people don’t just refinance with a goal of breaking even, as closing costs add up into the thousands. Therefore, you need to work with your mortgage broker to determine whether it makes sense for you to refinance. They can help you to calculate your closing costs, the point at which you’d break even, and how long it will take for the refinance to itself off. This is what will be the determining factor as to whether or not it’s worth it for you.

 

If you’re not planning to stay in your home long enough to break even and then some, then you should probably consider not refinancing.

Refinancing Your Rate & Term

When you refinance you need to pay particular attention to the term you are refinancing for. Although you can definitely save over the life of the new loan, a longer term can end up costing you more in the long run. So make sure that you don’t only focus on a lower interest rate.

 

If you’ve improved your credit since you got your original mortgage loan then this can also work in your favor to get you a rate and term that you’re happy with.

 

Cash-out Refinancing

While cash-out refinance comes with many advantages, it also has some disadvantages. For instance, if you use this type of refinancing to pay down your debt you’re also reducing the interest rate on that debt. On the downside, you may be actually paying more interest than you think if you’re taking a longer time to pay of the balance you owe. This is because you’ve basically transferred your debt to your mortgage and your mortgage may come with a longer term.

 

The biggest risk involved with cash-out refinances is that you’re turning your unsecured debt into secured debt. It’s one thing to miss a payment or two on your credit card, and see the affects it has on your credit, but it’s a whole other ballgame when you miss a mortgage payment or two. This could result in losing the home you live in and your home going into foreclosure.

 

But the biggest risk in this scenario is in converting an unsecured debt into a secured debt. Miss your credit card payments, and you get nasty calls from debt collectors and a lower credit score.

Miss mortgage payments, and you can lose your home to foreclosure. Home equity debt that’s added to the refinanced mortgage always was secured debt.

 

Consider your options carefully before deciding which type of refinance you’d like to go with. When in doubt ask your mortgage broker, they’ll guide you in the right direction, since they know you best.